Android or Bankruptcy: How Nokia Forced Microsoft’s Hand

by Matt Klassen on September 6, 2013

It’s a deal that makes no sense, at least for market analysts Ben Thompson of Stratechary and Benedict Evans. Why would Microsoft purchase Nokia, a move that in effect does nothing to improve the position of Windows Phone relative to the rest of the mobile OS market? The reality of such mergers and acquisitions, Thompson writes, is that for the most part they’re “value-destroying”, particularly for brands looking for a much needed boost.

The better move, Thompson argues, was the one Microsoft already made, partner with Nokia to market Windows Phone and essentially get all the benefits of owning Nokia, with none of the cost. In fact, acquisitions such as this often don’t solve the problems they’re intended to solve, so one has to think that there’s more at play here, perhaps the real reason Microsoft needed to purchase Nokia.

As Evans writes, the true nature of this deal can be found in the details of the transaction, asking questions like: “Why is Nokia licensing the brand instead of selling it when it has no consumer-facing business? Why isn’t Microsoft buying Here, the location platform? Why are the patents licensed instead of sold? Why did Microsoft take on the feature phone business?”

You answer these questions, both Thompson and Evans say, and you’ll find the truth, Nokia was at a crossroads: Abandon Windows Phone or go bankrupt.

There’s much that analysts will tell you that Microsoft gained from this deal, access to Nokia’s “industrial design, [global] distribution, [and] supply chain,” but as Thompson writes, they’re all things that no one really cares about because the simple fact remains, the Windows Phone operating system is right back where it was before the acquisition, lacking the app ecosystem and market support to really make an impact.

But its here that Thompson argues he may have stumbled upon the crux of his acquisition, the real reason Microsoft moved to acquire Nokia’s smartphone division, one way or another it was about to lose its only dedicated OEM.

As Evans writes, its been clear for quite some time that Microsoft’s Windows Phone is not working…not failing, but given its irrelevance in the market it might as well be failing. Given the fact that Nokia isn’t selling any Windows Phones, in addition to the financing Microsoft offered as part of the acquisition deal, its clear that Nokia was in trouble, perhaps much deeper than any of us realized. With Nokia teetering on the edge of bankruptcy, should it plummet into the abyss there’s no question it would have taken Windows Phone with it, ending Microsoft’s hope of infiltrating the mobile OS market.

No doubt looking to avoid this fate, Thompson speculates that Nokia was on the verge of making one last life saving decision: abandon Windows Phone. Viewed by many as Stephen Elop’s greatest strategic blunder, there’s no question that partnering with Microsoft doomed the Finnish company, as coupling itself to Android—something the stubborn Finnish company repeatedly refused to do—would have at least given Nokia access to an established ecosystem of apps.

So perhaps better late than never, Nokia may have been contemplating Android, and that, of course, would have cost Microsoft its only dedicated partner and likely its entire Windows Phone project.

In the end, this deal is certainly not unlike Google’s acquisition of Motorola, a move the search engine giant needed to make to quell growing infighting within the Android ecosystem. The stark reality of Microsoft’s decision is that, like Google, it simply had no choice.

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Written by: Matt Klassen. www.digitcom.ca. Follow TheTelecomBlog.com by: RSS, Twitter, Facebook, or YouTube.

{ 2 comments… read them below or add one }

Eric September 6, 2013 at 8:26 am

Just like how Android is saving HTC? You know HTC is sliding even faster than Nokia and they make awesome hardware as well. And the fact that these discussions were going on for 8 months doesn’t really fit your thesis. Also Nokia was very close to profitability so I don’t bankruptcy was in the cards either. I just find it funny that everyone says Android would save it, but outside of Samsung I don’t see too many manufactures raking in the profits. And had Microsoft not stepped in with a cash pile from the beginning, bankruptcy may have already been in affect like it might be for HTC soon.

Matt Klassen September 6, 2013 at 12:59 pm

Eric,

Thanks for the response. I have to agree that Android is almost never the saviour companies hope it will be, as it seems to create long term dependence instead of the financial freedom companies want. But that said, I doubt Nokia would be doing worse had it joined the ever-growing Android ranks, as it would have allowed Nokia to access Android’s plethora of apps and perhaps would have allowed the company to sell more phones by simply being another quality Android option, instead of a standalone Windows Phone distributor.

In regards to HTC, it won’t be going bankrupt anytime soon (admittedly no thanks to Android), as it now has access to the Chinese market, having been tapped to build a China-centric mobile OS last month. Had Nokia been in the running for a lucrative deal like that, it would still own its own mobile division as well.

But again, the crux of my thesis was that Microsoft gained nothing from this transaction, the smart money being on maintaining the sort of partnership it previously had with Nokia. Why purchase Nokia now, unless Microsoft’s only dedicated OEM was looking at other options? My point, Microsoft nabbed Nokia because it was going to lose Nokia, and what other options are there except to bankruptcy or another mobile OS?

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